News that the Indonesian state oil firm Pertamina indicated it favours the euro over the dollar barely got a mention as the war in Iraq and the Sars virus dominated the headlines.
Pertamina, Indonesia's state oil company, dropped a bombshell recently. It is considering dropping the US dollar for the euro in its oil and gas trades.
With war unfolding in Iraq and a mysterious pneumonia (Sars) spreading around Asia, few noticed. News that Indonesian government officials favour the euro also fell through the cracks. Yet it could have major implications for the world's biggest economy.
Other Asian countries may not be far behind any move in Indonesia to dump the dollar. The reasons for this are economic and political, and they could trigger a realignment that undermines US bond and stock markets over time.
Indonesia's rationale: the dollar may be the world's reserve currency but it has become too volatile. 'One thing is for sure, the adoption of the euro as an alternative means of payments could be an effective solution to speculative dollar-oriented dealings,' Indonesia's vice president Hamzah Haz said last month.
Conspiracy theorists can rest easy. None of this has anything to do with the fact Indonesia is home to the world's largest Muslim population. Rumours of Southeast Asian Muslims and Arabs banding together and dumping dollars to stick it to the US ignore the very real economic justifications for it. This is also not necessarily about Iraq-related tensions.
Last year's accounting scandals shook many Asians' trust in the US economy. The view there is that little has been done to reform the system.
News that a unit of Halliburton, formerly run by US vice-president Dick Cheney, has already won a post-Iraq war contract has Asians buzzing about American-style crony capitalism, much like the US used to complain about Asian cronyism.
People in Tokyo also worry that the US has fallen into a Japan-like funk. The Federal Reserve's moves to cut interest rates to 40-year lows have not boosted US growth the way Asian leaders and companies expected. One of the most commonly asked questions in Japan is this: 'What if the US cannot right itself?'
War in Iraq has added to the dollar's woes. The US currency has lost more than 18% against the euro over the past 12 months and is down more than 8% versus the yen.
Perhaps the biggest risk for the dollar, at least in the eyes of some analysts in Asia, is uncertainty surrounding US foreign policy. Now that war in Iraq seems to be wrapping up, Asian markets are wondering if the US will pursue regime change elsewhere. In recent days, for example, the Bush administration has had to deny it is planning to attack either Syria or Iran.
Here in East Asia, most of the focus is on North Korea. While war is unlikely, 'a miscalculation, a misunderstanding or a hawkish assessment of North Korea's intentions by the US could lead to an incident that could escalate,' says Steve Vickers, chief executive of International Risk, a risk management consultancy.
For Indonesians, questioning the dollar is less about political backlash for war in Iraq than genuine uncertainty. Geopolitical and economic concerns have Indonesian officials and companies wondering if the dollar will become even more volatile. What if, for example, the US began setting the stage for another pre-emptive attack in the Middle East or East Asia?
Even so, there is no ignoring Asia's desire to reduce US influence in the region. Asian leaders wonder if scrapping the dollar might expedite the process. Last September, Asian and European leaders formed a task force to help Asia boost euro currency reserves, issue more euro-denominated debt and use the single currency to settle trade bills.
One reason leaders such as Mahathir Mohamad of Malaysia favour the euro: it lacks a domestic agenda. Washington has proven quite adept at steering the dollar up and down depending on economic needs. In the early 1990s, a lower dollar was favoured to boost growth. Later in the decade, the White House favoured a rising currency to attract foreign capital.
Since 12 countries use Europe's single currency, it may be less susceptible to unpredictable political agendas. Also, the European Central Bank manages it rather than politicians.
In a perfect world, the Japanese yen would be Asia's preferred currency. Tokyo's active manipulation of currency markets makes the yen about as appealing as the Russian rouble.
That's not to say Indonesia or other Asian economies are rushing to rid their vaults of dollars. Asian policymakers are cognizant of the euro's own track record for volatility. When, or if, the US economy recovers, officials will have a better idea of how seriously to take the euro's gains.
Still, the long-term prospects for the dollar as the undisputed champion of trade and finance have dimmed along with the economy. It is not clear what Washington can do about all this but it's a dynamic that could lead to tectonic shifts in markets everywhere.
Bloomberg newsroom, Tokyo
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